Fitch Affirms Taiwan at 'A+'; Outlook Stable

Fri Jul 18, 2014 6:41am EDT

(The following statement was released by the rating agency) HONG KONG/LONDON, July 18 (Fitch) Fitch Ratings has affirmed Taiwan's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'A+' and 'AA-', respectively. The issue ratings on the Taiwan's senior unsecured local currency bonds are also affirmed at 'AA-'. The Outlooks on the Long-Term IDRs are Stable. The Country Ceiling is affirmed at 'AA' and the Short-Term Foreign Currency IDR at 'F1'. KEY RATING DRIVERS External finances are Taiwan's key rating strength, providing a robust buffer against external shocks. Net external asset position was 150% of GDP in 2013, compared with the median of 14% for the 'A' rating category. Over half of the asset position is held by the sovereign. Net sovereign foreign currency assets, mainly reflecting FX reserves covering more than 15 months of current external payments, were equal to 89% of GDP, while the rating median is 15%. The current account surplus reached 11.7% of GDP in 2013 and the average over the last five years was 10.4% of GDP despite a marked slowdown in export growth. Taiwan's public finances are a neutral factor in the credit profile relative to 'A' range peers. The gross general government debt (GGGD) and deficit to GDP ratios are in line with the 'A' median at 49.8% and 1.9%, respectively. The government has announced a multi-year fiscal consolidation strategy targeting a budget deficit of below 1% of GDP by 2016 by implementing both revenue and expenditure side measures. Fitch forecasts a declining budget deficit from a peak of 2.3% of GDP in 2014 to 1.5% in 2016, based on the TWD70bn-120bn (USD2.3bn-4bn) in tax increases envisaged in the government's fiscal consolidation programme. Fitch assumes that the risk of contingent liabilities from non-profit special funds will remain low. Fitch forecasts the GGGD/GDP ratio to remain broadly flat, at close to 50% in 2014 and 2015. The debt ratio could start falling in 2016 as the government's consolidation strategy progresses and could fall to 40% by 2023 under a baseline scenario. Taiwan has recently had a mixed macroeconomic performance. Inflation is low and stable, unemployment has declined from its 5.8% peak in 2009 to 4.2% in 2012 and 2013, comfortably below the 'A' median (6.7%). GDP growth was only 2.1% in 2013, below the five year average of 3.3%. The economy so far has failed to return to pre-crisis growth rates of about 4% following the 2012 cyclical trough of 1.5% as the contribution from net exports remained subdued. GDP is more volatile than the rating median as the very open economy is heavily exposed to exogenous demand shocks. The potential effects from the rebalancing of the economy in China - Taiwan's largest trading partner - are uncertain while the strengthening recovery of advanced economies is expected to boost the recently very subdued export growth. Taiwanese firms could benefit from higher consumption demand in China while a weaker Chinese renminbi could support the profitability of the Chinese operations of Taiwanese firms. However, the industrial upgrading and import substitution strategy in China over the last few years have resulted in stagnation of export growth to China despite the further economic integration under the Economic Cooperation Framework Agreement (ECFA) signed in 2010. Fitch judges systemic risks to be low in the large banking system as asset quality is strong, non-performing loans are low and profitability is at healthy levels. Nevertheless the mortgage debt/GDP ratio is 95% and house price to income ratios, while stable over the last years, are very high, exceeding 15x in Taipei and 8x in six large metropolitan areas, in comparison internationally. The banking sector's exposure to China has increased quickly since 2010 and, by Fitch's estimate, was equal to USD90bn (7% of total assets) at the end of 2013. Public ownership is relatively high, at 50% of system assets, magnifying the contingent liability on the sovereign to provide support in case of need. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. The main factors that could lead to a positive rating action, individually or collectively, are: - Increased confidence that the GGGD/GDP ratio is on a firm downward trend over the medium term, most likely driven by a combination of stronger GDP growth and fiscal consolidation. The main factors that could lead to a negative rating action, individually or collectively, are: - A swift deterioration in the banking sector's asset quality, in light of the macro-prudential risks stemming from real estate and rising China exposure. - Adverse macroeconomic or financial shocks, either domestic or exogenous, that significantly slow the economic recovery, adversely affecting the public finances and the financial sector. KEY ASSUMPTIONS - No substantial changes in the relationship between Taiwan and China and a continued high level of political stability, with no major political or social disruptions that affect the business environment - The Chinese economy avoids a hard landing and manages to smoothly rebalance from an investment-led growth model to contain leverage. Contact: Primary Analyst Andrew Colquhoun Senior Director +852 2263 9938 Fitch (Hong Kong) Ltd 28th Floor, Tower Two, Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Gergely Kiss Director +44 20 3530 1425 Committee Chairperson Paul Rawkins Senior Director +44 20 3530 1046 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Sovereign Rating Criteria here Country Ceilings here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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